DSDVF - DSV A/S (DSDVF) Q4 2022 Earnings Call Transcript
DSV A/S (DSDVF)
Q4 2022 Earnings Conference Call
February 02, 2023 05:00 AM ET
Company Participants
Jens Bjorn Andersen - CEO
Michael Ebbe - CFO
Jens Lund - COO
Conference Call Participants
Stig Frederiksen - ABG
Ulrik Bak - SEB
Alexia Dogani - Barclays
Muneeba Kayani - Bank of America
Michael Rasmussen - Danske Bank
Lars Heindorff - Nordea
Marc Zeck - Stifel
Sam Bland - JPMorgan
Rachel Short - Jefferies
Sathish Sivakumar - Citigroup
Nikolas Mauder - Kepler Cheuvreux
Cristian Nedelcu - UBS
Robert Joynson - Exane BNP Paribas
Presentation
Operator
Welcome to the Presentation of the DSV Annual Report for 2022. For the first part of this call, all participants are in a listen-only mode. Afterwards, there will be a question-and-answer session. [Operator Instructions] This call is being recorded.
Today, I am pleased to present Group CEO, Jens Bjorn Andersen; Group COO, Jens Lund; and Group CFO, Michael Ebbe. Speakers, please begin.
Jens Bjorn Andersen
Thank you very much. Jens Bjorn Andersen here. Thanks for joining us for the full year 2022 results from Hedehusene, Denmark. You've probably seen the presentation. Its online.
After having clearly looked at the beautiful photo on the front page of a bridge in Tokyo, you can go to page number two, and look -- and read the forward-looking statements and then further on go to page number three with the agenda for this morning. Those of you who have listened in before will probably recognize the agenda and you can read it yourself.
So with that said, I just wanted to remind you that when we get to the Q&A, we would kindly ask you to refrain from asking more than two questions each to respect the time we would like to get this done in about one hour. I'm sure you also have a very busy day.
But page number four talks about the highlights of what we do deem as an exceptional and very, very strong year for DSV. By far the highest and the best EBIT result this company has ever seen. And far above the initial guidance, we gave of between DKK18 billion to DKK20 billion of 2022 when the year started.
So, overall, on a day like today, we can be happy, we can be proud, we are still humbled. But all the staff members of our company have done an absolutely fantastic and remarkable job. And we are both proud and very pleased about the performance. It's not often that we can show to an EPS growth of 60%. And also, please be reminded, I'm sure you're aware that looking at the EPS for a longer period of time, we still have a very, very strong development.
Also been a more eventful year than probably ever before. Amongst others, we have integrated GIL in a record-breaking pace in less than 12 months. It was not an insignificant chunk of business. And then off the top of that we have seen extreme market volatility and the year was also characterized by a great degree of supply chain disruption.
We always say that cash is king in DSV. So, the fact that we had a very, very -- I'm sure Michael will spend some time because that's really highlight of the year also very strong performance of the cash flow. And the fact that we've been able to distribute or allocate over DKK21 billion to shareholders is really a great feeling and Michael will elaborate on that.
This morning, we have also released the earnings guidance or the EBIT guidance for this year. For 2023, we estimate that the result will come in between DKK16 billion and DKK18 billion and that reflects that the market is normalizing and that we will get at least at the beginning of the year, some macroeconomic headwind.
As such, is a little bit against the law of nature and DSV where we normally always have a higher result than the previous year. But as such we are actually pleased about the fact that we will see some sort of normalization in 2023 and that we will get back to levels that we can recognize will be in somewhat similar to what we saw in various degrees I have to say before COVID. So, nothing wrong with this -- the result. If we can achieve this between DKK16 billion and DKK18 billion is still internally considered as ambitious and very strong.
Not to forget, we also announced this morning, our new sustainability ambitions to -- and we have committed with a science-based target to a net-zero target by 2050. We're very happy and also proud to take part in this journey of decarbonizing our industry.
So, with that, we'll go to the divisions Air & Sea. Again, very strong results. We have seen a certain decline as we would have expected in Q4, driven both by a soft market where volumes declined, but also, of course, yields going down. So, more or less as we had expected, nothing dramatic in the development in Q4. We had basically been aware that this was going to happen and the fact that it happened was actually good, because it sets the base for -- as I said before more normal situation going into 2023.
A lot of you -- and we will not elaborate too much of this, but a lot of you have asked if we will sit on our hands and do nothing with the cost base. We get a little bit disappointed when you ask this question because if you know us well, you should know that this will not be the case. We will do what we can to adjust the cost base and we have already Air & Sea and also for the two other divisions taking steps to align the cost base with the lower volume. We need to ensure that the productivity of our divisions to not decline.
We feel that the Air & Sea division is very, very strong. The network is -- it will never be complete, but it is strong. We have great competencies from digital point of view, high service levels, great employees, good leaders in the operation. So, we feel that the division is stronger than ever before. And we have now to go out and grow our volume and take market share in the coming months, but very, very strong performance and the fact that the division surpassed DKK20 billion is, of course, absolutely remarkable compared to the EBIT result the year before.
So, flipping to the next page just quickly on the products, first, Air freight. Maybe we should start by looking at the markets for Q4. Of course not an environment you want to be in. For many, many quarters in a row, we have seen a decline in volumes of between 15% and 17%. Our own market development is approximately minus 16%. So, we are in line with the market.
We have still moved 368,000 tonnes of air freight, so we have still been busy. And we have managed to have a fairly reasonable yield also of above DKK11,000 per tonne. So, there's no really peak season and we have to see how the development will develop how the development will be for 2023.
Inventory -- high inventories by our customers is, of course, one reason for the low decline -- or for the low development in volume. And of course also the fact that air freight is the most expensive mode of transport, has meant that it has -- had this weak development.
Sea freight on page number seven, more or less the same story as air freight. I did forget to say we also have to remember that air freight is in nature more volatile than sea freight, so we will expect less volatility here on sea freight than what we have seen on air freight.
Market is down approximately between 9% and 11% and we have the same development also. So, we have volume development more or less in line with the market.
Still a higher yield than we had a year ago of a little over DKK5000 and we have to see now -- we're very eager to see how the development will be when we get into February here after the reopening of China -- after the Chinese New Year. We do expect that volumes will develop in a better way than what they have at the beginning of the year. But overall, we are happy and content with the situation.
Then we'll go to road freights. A couple of things have happened. First, we would like to point your attention to the gross profit. It's more or less in line with what it was last year. So, of course, you can allude from that that we have had a higher cost base.
A couple of things have happened. We have tried to highlight that. We have to remember we have exited Russia and Belarus [ph] and Kaliningrad. So, some profit was in the numbers for 2021, which we missed this year. And then we have been hit a little bit in one region, which is South Africa, where we've had certain issues that we've been dealing with, which has had a negative EBIT effect.
And also at the very end of the quarter, a little bit later than what we did see on Air & Sea, but also at the very end of the quarter, we did see a little deterioration in volume and we were impacted by that also here, it was no surprise.
Also, congratulations to the Road division of surpassing not DKK20 million but DKK2 billion in EBIT for the full year. This is also a great achievement and growth the year-on-year of 9.2%, something that everybody in the division can also be very proud about.
Last slide before I hand over to Michael, is solutions. Some of you have asked about the development this morning and this was also expected. We are also here pretty happy with the gross profit where we have had an increase. We are very aware of the fact that we need to get the reporting right all the time and even though it annoys investors and ourselves, for that matter, we have done a little reclassification of some of the cost base, which makes a difference between GP and EBIT.
And then also at the end of the year, we did do a few accruals also on the cost base to make sure that we don't carry any risks, so to say, from 2022 into 2023 as such that has happened throughout the company.
Then the last thing I wanted to say is that when we look at the Q4 numbers for 2021, it was the first full quarter of GIL and it was probably a little bit too good. There were also other allocation mechanisms in GIL than what we have in DSV. So that has also been one of the reasons, but you shouldn't be too concerned. We are full of optimism and we still believe that solutions will continue to produce good and strong results.
And also here, growing earnings from DKK1.7 billion to DKK2.7 billion for the full year is absolutely fantastic. And also job really well done for everybody working in the Solutions division.
And with that said, I'll hand over to you, Michael. So, please take it from page number 10.
Michael Ebbe
Thank you very much. And yes, I will go to page number 10 with the -- some KPIs from our profit and loss 2022. I think Jens Bjorn has already explained the development in EBIT, so I'll just touch upon some few other KPIs here. Clearly, the revenue is -- especially in the fourth quarter is impacted by the lower freight rates and also the declining volume as Jens Bjorn already mentioned. So, clearly, the gross profit has been less volatile than the revenue also as expected.
Another thing that we have seen, especially here in the second half of 2022 is obviously the currency impact and that has also had an impact of our cost base. Most likely, some of you will say how will that develop in the guidance and what we can say here is that as always, we are an asset-light, so we are investigating different opportunities to protect the conversion ratio.
I would also say that we aim to have the same cost base in 2023 as we had in 2022. So, that's about it for the cost base. Then I will say like always, we do have some foreign exchange adjustments, it's still related to our intergroup loans. So, no cash impact there.
Then our tax rate is 24% for the full year, a little bit as expected and then when we come to the guidance, we also expected that will be this tax rate going forward as well.
Last KPI on this page Jens Bjorn has already touched upon that this -- earnings per share with a growth of 60%. Clearly driven by strong earnings growth and we expect that it will normalize in 2023.
Then we skip to the next page 11 with the cash flow. We believe ourselves, it's a strong cash flow that you can see here. All earnings reported are converted into cash and the adjusted free cash flow are then allocated back to the shareholders that you will see in the next page.
The growth in the cash flow is obviously driven by the earnings, but also our network capital that we have worked with throughout the year. So, it's good to see that that has been reduced.
Clearly, there's also an impact on the lower rates and the lower activity level, but we have also done a lot of initiatives in order to work with that after we have implemented the deal. The net -- the development of the net working capital in the same line is offset by higher tax payments due to the higher results obviously.
Our gearing ratio is 1 -- exactly 1.0. That will also if you look at 2023 when our guidance taking into consideration, the EBIT DA will obviously decline, meaning that that will have an impact on the gearing ratio as well as well. We do obviously still have a target of staying below two times EBITDA. So that is, of course, what we want to work with.
Our capital structure and balance sheets are in good shape. I think we have nearly DKK10 billion in cash and the average duration of our corporate bonds is 8.3 years and the first corporate bond that we have to repay or refinance is in 2024. So, we have a good balance sheet here. Our return on invested capital are also satisfactory, 25%. So, also impacted by the growth in earnings.
The next page number 12. As mentioned, we have allocated all the cash, all the earnings that we have converted into cash. We have then allocated back to the shareholder, so we have nearly 19 million shares were bought back into the 2022, giving an allocation to the shareholders of DKK21.6 billion in this table that [Indiscernible] has provided you with.
I think for the dividend part, we will -- we have suggested to increase the dividend from DKK5.5 per share last year to DKK6.5 for this year. We have also, like we normally do at every quarter, assessed our cash flow for the current period assessment. And we have initiated a new share buyback of DKK2.5 billion starting today and run until we publish the first quarter results in April. So, that's the allocation part.
Then I go to the next page number, page number 13, the outlook for 2023. I think you've already read that this outlook is significantly lower than our results this year. It's clear when we talk about outlook, it's more uncertain market and macro-economic outlook that what we have been used to. That's obviously reflected in our in our guidance here, which is between DKK16 billion to DKK18 billion, that is how we see it. Currently, we do expect the first half of 2023 to be negatively impacted and then we assume a normalization or improvement in the second half of 2023.
It's clear the Air & Sea division is one that has gained the most -- the market conditions, so they will most likely also be the one with the highest decline. Our tax rate, it's expected to be 24%. It's a little bit harder than what we've seen, but that's due to the nature of our earnings and the way that it's structured these days. It's still our target, obviously, to take market shares in all areas, so that is also what we will work with. And I think that's about it for the outlook.
Then we've also -- the last slide from my side, slide 14, it's just to remind you that we adjusted our long-term financial targets last year, exactly a year ago and we maintain the current long-term targets. It has been an unusual year this year and now we look into normalization. But that doesn't change our ambitions for the more long-term 2026.
And I think that's it from my side. So, we can go to the Q&A. I have assumed lots of questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions]
[Technical Difficulty]
Unidentified Analyst
Two questions from me, please. First, on volumes into the medium term. Do you think in 2023 that we're undershooting what would be a normal level of volumes and therefore, there's some subsequent capture to come or the future years probably look like pretty normal growth rates of a 2023 baseline? And if there is no catch-up to come back, the destocking that we're seeing now, why might that be?
Second question is on GP yields. So, your outlook for the year suggests your GP is down between 20% and 25%, which would be about15% higher than the targets at the Capital Markets Day from last year. Should we be thinking about more medium-term upside to the 8,000, 4,000 levels that we talked about at the CMD, please? Thanks.
Jens Bjorn Andersen
I can talk a little bit about this. Good questions. When you talk about the reduction of between 20% and 25% as we have guided, you have to take into account that this is the average for the full year. So, you can make your own calculations as when you expect this to kick in.
So, we still believe that what we have indicated before is correct. And I think with this number, you can also make calculations getting to that point. But we've also said that we are slowly moving a little bit away from giving the hard kind of numbers on the yields because we have also come to realize that it is very difficult for us to anticipate exactly how the yields will develop going forward.
We have said on the volume side that we -- it's the biggest misalignment we have ever seen from growth in the GDP of the world, which is estimated to be 2% maybe 3% this year, and we guide that volumes will drop 2% to 5%, of course driven by high inventories. So, let's see how it goes.
Of course, we'd prefer 1% rather than 5%, but this is the best estimate we have right now. And we think also we've seen that already with the continuation of the weak markets from December going into January, we do expect that it's not going to be super strong in the first quarter, but then we hope to see an improvement subsequently in the quarters to come.
Unidentified Analyst
All right. Thank you very much.
Operator
Thank you, Alex. The next question will be from the line of Stig Frederiksen from ABG. Please go ahead, your line will be unmuted.
Stig Frederiksen
Thank you very much for taking my question. A question back to the capital structure because calculating backwards on what you've announced of share buyback DKK2.5 billion that would go into April. And then comparing back to that you were guiding DKK16 billion to DKK18 billion on EBIT and DKK5 billion on depreciation and an EBITDA of DKK21 billion to DKK23 billion, what should we think about returning cash? Do you want to deleverage?
I am aware that you are multiples or ratio would go up to 1.3%, 1.4% based on the guidance you've given today. But are you seeking to keep it around one-time or should we expect maybe more cash returns relatively in the second half? That’s my question. Thank you.
Michael Ebbe
Its Michael speaking. Steve, we have not changed in our ambitions or our guidance for the ratios. What you need to take in mind here is that when we look at the first quarter, we always have a little bit lower cash flow for the first quarter. So, that's reflected in this one.
And then when you talk about our earnings, we also have to pay some taxes, and we also have some interest that we need to pay. So, I think that that's what we will keep for the time being, but we don't have an aim to deleverage the company. We still have an aim of being below two times.
Jens Bjorn Andersen
Let me just make it very clear. We have the ambition to return all the proceeds of the earnings of the company that we convert to cash to shareholders 100%, if possible. It has been a true pleasure on buybacks in 2022, the fact that we could purchase about 9% of our own company and eliminate those shares was absolutely a fantastic feeling.
Stig Frederiksen
Super. Many thanks.
Operator
Thank you, Stig. The next question will be from the line of Ulrik Bak from SEB. Please go ahead, your line will be unmuted.
Ulrik Bak
Yes, hello Jens and Michael. First question on this cost cutting procedure that you alluded to. Can you please just confirm that you expect your fixed cost level to be flat? And is there any variability depending on whether we will see volumes decline 2% or 5%? That will be my first question.
And then second question on the yield. Can you perhaps just shed some light on the compensation of this yield structure? How much is purely related to the level of the rates? And how much is more fixed pricing customs and other kinds of services? Thank you.
Jens Lund
Yes, it's Jens Lund here, hello everybody. When we look at the cost cutting, I actually don't like phrase cutting. It's basically then we adjust the capacity to the volumes that we produce. And then as an example, if you said in the department, you produce in on your 10 people, if we are down on volumes, so we produce index 90 [ph], we need to be nine people.
Then what happens as a general rule of thumb what happens is then that people are very focused as [Indiscernible] on what is going on a daily, weekly, monthly basis, quarterly basis on the productivity measures so that we have the right conversion ratio. We've been having the focus -- I've only been here for a little bit more than 20 years, but it's been the same ever after.
And this adjustment already started in Q4 last year, and it's continuing into this year. And then depending on, as you say, it's a 2% down for the year of 5% to these mathematics will apply, and we will, of course, govern it from the top. Accountability is basically our middle name, and we're very accountable when it comes to this. So, you can rest assure that we will protect the conversion ratio.
When it comes to the yields, is it rate or is it basically our fees I think it's basically mostly related to the yields to the rates because, of course, now capacity is not what can I say, a tight resource as it used to be. So, we won't be able to kind of say to make the same trading gains that we've done previously.
Our fees, let's say, to do a custom declaration or the sell an insurance or whatever, they are very stable in their nature. It might be that it will be a little bit harder just short-term to increase but normally, what can I say, if the cost base go up on the production cost of these, then basically the fees they also have to increase Otherwise, we have to deliver higher productivity via digitalization and order to protect what can I say, the conversion that we have on them. So, I hope that answers that question as well.
Ulrik Bak
Thank you so much. Very clear.
Operator
Thank you, Ulrik. The next question will be from the line of Alexia Dogani from Barclays. Please go ahead, your line will be unmuted.
Alexia Dogani
Yes, good morning, it's Alexia here from Barclays. Just two for me as well then. So, just following up from comments just now on the conversion ratio. Obviously, you've said that in the first half, volumes will be weaker than in the second half, but given your prior comments on the GP yield, most probably the GP yield will be weaker in the second half than the first half, given kind of potentially an exit rate closer to your medium-term target.
How quickly are you able to adjust, I guess, your cost base to reflect the GP yield reductions? Because I assume with kind of service intensity coming up, maybe volumes are improving a bit, but not to the extent to offset the GP yield decline. Are you kind of mindful to that dynamic as well? And should we expect foresee further year conversion ratio to be kind of bottom at 50%? And should the quarters be broadly similar? Sorry, that's a long first question.
And then secondly, just on the shipping industry. Obviously, we are going into likely a very challenging backdrop for them given they don't have the similar ability to adjusted cost base.
As a large customer, how do you feel potentially the risks that they go into losses? The industry goes into losses next year? And how does that matter to you? Is it a positive or negative or neutral? Thanks.
Michael Ebbe
I can just take the last one first. We have basically no interest in the profitability of the shipping lines and this is not meant -- kind of disrespectful manner as long as they have the funds and I'm sure they have that from 2022 to continue to invest -- produce services that we and the shippers need, and we are happy about this, and we will not go into speculation if they will go into losses or whatever, you probably have much better views on that than what we have.
What we have said though is that you're right, market dynamics have changed. And we are of the opinion that we need to stay loyal to the shipping lines that supported us during 2022 where access to capacity was difficult. So, the ones that helped us back then, we will help now and I think this is also only reasonable. And I don't know, Jens, if you would continue a little bit on the conversion ratio.
Jens Bjorn Andersen
I think you can already see it in the Q1 numbers that we've already -- will be able to see it in the Q1 numbers that we've already taken out costs. And this is something that is very dynamic. It happens on a daily basis. The vast majority of -- what can I say, adjustments will be made by just normal turnover -- staff turnover that you have in departments.
And there will probably be a lag of two, three months because you have to be certain when you reduce the capacity, but I think that will be the lag impact that you will see. So, we should be fairly quick on that. So, it may lead to that we have a little bit lower conversion the first part of the year than we will have in the second half. But to put percentages on it is very difficult, but I think that's how the numbers should basically pan out at the end of the day.
Alexia Dogani
Thank you.
Operator
Thank you, Alexia. The next question will be from line of Muneeba Kayani from Bank of America. Please go ahead, your line will be unmuted.
Muneeba Kayani
Good morning. So, with Agility now integrated, where are you M&A plans. And if you could generally talk about the M&A environment in the Forwarding market?
And then second question on yields. Could you give an indication of what was the exit rate for Air & Sea yields in the fourth quarter? And just a clarification. So, did you just say that the second half yields will continue to decline, while volumes could improve? Thank you.
Jens Bjorn Andersen
I'll talk a little bit about M&A. We are ready to do M&A. We've concluded the deal integration and world record time. I'm very, very happy with the way that the organization have embraced yields, the way we have done it, all the support functions, finance, IT, I don't want to mention anybody else because I will leave someone out have done a remarkable job. It's a sizable company. We have acquired as many, many tens of thousands of employees. We have put on to our platform. It tells us that we have a scalable situation, which we are very happy about.
So, from principal point of view, we are ready. We have been for some time. What we need now is to kind of get some sort of alignment between sellers and buyers. It has been a little bit difficult. It's no surprise in 2022, where results were very high also. We were always of the opinion that this was temporarily.
Now, we will see that. It's at least reflected in our own guidance. If you get one or two quarters under your belt, you will also see it in the actual reported numbers. And then we have the expectation that there will be an alignment between two parties. So, there can be some sort of consensus around the table and deals can be done.
So, we go into 2023 full of optimism also on the M&A side. Will we be successful? We cannot promise that. We don't know. There would be different opportunities that we will pursue. But what we can say is that we, I don't know, 25-year-old strategy that we have had in DSV, but we want to grow through acquisitions that it makes sense. That is 100% intact.
We think that we can demonstrate that we have generated value for all stakeholders, not least shareholders through M&A. So, basically, why stop that now. And maybe, Jens, I don't know if you want to go further into the yield.
Jens Lund
The yields, I think -- the thing that the yields, I think I can explain that a little bit. We will not go into specific numbers on what was specific day we will refrain from that. But of course, I think in Jens Bjorn's comment was basically, as you know, we will probably see a little bit higher yields in the beginning of the year, as you alluded to, and then has better volumes in the second half, but also a little bit lower yields. So, that's basically a confirmation from our side.
Muneeba Kayani
Thank you.
Operator
Thank you. The next question will be from the line of Michael Rasmussen from Danske Bank. Please go ahead, your line will be unmuted.
Michael Rasmussen
Yes. Thank you very much for taking my questions. First, I would like you to talk just a little bit about the journey ahead of us in terms of the Road Way Forward. And also, if you can tell us if any costs have been or will be incurred from the change of just the new transport mode management system. So, that's my first question.
Secondly, I want to continue a little bit on the sub-suppliers on the ocean side here. So, as we're entering 2023, is there anything that you are doing different versus a normal year? I mean, obviously, you're probably doing things very different from the past two years when just getting space has been so difficult. But just from a contract view, are you thinking about being more short the market than normal? Or are you using maybe the lower rates to maybe add a little bit of contract or any flavor that you can -- that you would add on that, please?
Jens Bjorn Andersen
We will also for competitive reasons, not go too much into how we contract with our carriers. But I guess we can say a couple of things, Michael, it's a good question. One is that we are probably slightly shorter than what we have been. We've been tempted many times to go along, but history tells us that it's a short week right, and then it turns out to be -- can be a disastrous in the future. So, we are a little bit shorter than what we have been.
And then maybe a point, which is also important to emphasize and to mention for all of you, we do not carry anything into 2023 from 2022 when it comes to agreements with carriers, which are not kind of mark-to-market. So, this is something which is very good to be able to establish that we do not have a lot of agreements, which are priced in the previous market environment that carries into 2023 or 2024 for that matter. It's all been kind of aligned.
So, we start the year in a way where we are kind of being priced according to market conditions. And then Jens, as you are a little baby, of course, Road Way Forward all of us [indiscernible] but you have a special interest or maybe you want to--
Jens Lund
The thing is what happened during last year was, of course, there's two angles in particular, the Road Way Forward project. One is this European group is network from a physical point of view, how we develop moving the cargo that's progressing according to plan and basically more or less all the lines up and running. And it's basically price from [indiscernible] lead-time and how that works as all set up and structured.
Then on the IT side, we need to automate more of these processes now that we have this fixed structure. And here, we have not made the progress that we had expected because we did not get any deliverables from our IT vendor in 2022. We've gotten them now the 2022 deliverables and they are already deployed into production, and we need to release more.
Once we have these two releases in place, called 23.1 and 23.2, it’s a very good way they invent how they do the releases so that we can follow-on. When we have them, then we don't need more development. And then it's basically a rollout game. But it slowed us down this with the year under projects. And when you have these projects, it's very important that you don't accumulate this cost in the balance sheet, but you're expense it as you go along.
It's probably also hurt cost base a little bit on road during the year, but that's how it is. We can't capitalize costs and then have some big problems sitting in the balance sheet. So, that's a little bit on the Road Way Forward, and we're still equally optimistic about, in particular, the traction we have on the commercial side.
Here on some of the lanes where we've established this, what can I say, higher quality service and product and better visibility that we are 200%, 300% under volume. Of course, it's not all the lanes, but it's definitely good news and carries over to all the other lines.
So, I think we have a plan that we want to grow faster than the market. We have to remember that it's only a certain proportion of the road business is probably between -- around a little bit less than 15% of the volume in road, that is this kind of [indiscernible]. So, it also has to grow fast, if it really has to have a meaning. But I'm quite comfortable that we will continue this because it definitely is very welcomed by our customers. And this is what matters at the end of the day.
And then whether we will be able to get the conversion of that depends on the infrastructure that we have available to support the production. And as I said, we will also make that happen. It just takes a little bit longer. So, we also have to say that not all things work out just exactly as they should, but we're making progress.
Michael Rasmussen
Great. Thank you very much for answers -- both my questions. Thank you.
Operator
Thank you, Michael. The next question will be from the line of Lars Heindorff from Nordea. Please go ahead, your line will be unmuted.
Lars Heindorff
Yes, thank you. A couple of questions regarding Road and Solutions and also a little bit about the guidance. Now, in Q4, you experienced actually a decline in solutions and the revenue and that actually comes past, I think, two or three quarters where you have plus 10% organic growth.
So, maybe a few words on the development there in Q4, which appears to be sort of declining a little bit faster than lead had expected. And then on the same line, you expect roughly flattish markets for Road and Solutions into 2023, maybe a few words on that. Is that -- what will that mean in terms of volumes? I know you don't disclose shipments, but maybe you could say a little bit about the price development in those Road and Solutions and how that will impact the [Indiscernible]?
Jens Lund
I think if we take solutions first and development in the revenue, it's clear that as the economy has slowed a little bit down, we have seen which actually produces more less the same number of order lines, but the mix has changed quite a bit when it comes to that Lars.
So, let's say that you had a certain number of activities per order that has definitely come down. So, we still ship with a higher frequency, there's a lot to do, but we make a little bit less money.
I think on the utilization in the warehouses, it's a little bit down compared to what we saw in the previous quarters as well. So, we also get a little bit less storage income. I think these things will be true -- we probably also have some regional differences where we had an exceptionally good start in the Middle East last year that also helped us quite a bit. That's been -- it's been okay, but it's been a little bit slower this year as well.
Then we talked about the -- or you asked about how do we see volumes into the next year. And it's clear that there will probably also be an impact for Road and Solutions, but not as dramatic as you will see it for the ocean side. So, we do expect that it will be a couple of quarters here where activity will be a little bit lower, then hopefully, it should get a little bit better as we progressed during the year.
Actually, some of the indications that we have on solution have us by [Indiscernible] couple of times, what are we doing? How is the activity? And he is actually fairly confident -- now he's a confident guy I'm saying, but he's fairly confident when it comes to that. And I also think that the Road team even though it's a little bit less busy and perhaps easier to get capacity, they're still also confident.
So, this kind of flat -- a little bit positive development -- this is probably what we're looking into. And we will then adjust the capacity we have available according so that we continue to show some strong financial numbers.
Lars Heindorff
Yes. And just a follow-up, but you have announced a few price increases in relative towards the end of 2022, will that carry into 2023?
Jens Lund
Yes. We try to hold on to the price increase because some of the large customers, of course, they push back and I don't think that we will get a dramatic extra income. I think we've also increased the yields. And now perhaps the push will be towards the suppliers as well as Lars, if the capacity situation allows us, but we are not 100% certain where that will end out yet with the suppliers. So, we will have to see.
Lars Heindorff
Thank you.
Operator
Thank you, Lars. The next question will be from the line of Marc Zeck from Stifel. Please go ahead, your line will now be unmuted.
Marc Zeck
Yes. Thank you for taking my questions. First question would be on net working capital. Do you expect another, let's say, significant release of free cash going into next year's as, let's say, line [ph] rates is ongoing? Or do you feel like most of the capital release from rightsizing net working capital is already done?
And the second question would be more on the, -- let's say, more general side and the freight market. Do you expect any impact from the solution of the alliance between Merck and MSC [ph] and in terms of was it more difficult when Merck decided to, let's say, not service trade rate somewhere to the same extent as previously? Did that impact your bookings with MSC as well? Do you expect that to improve? Or is it just too early to tell right now? Thank you.
Michael Ebbe
I can take for the net working capital first and then maybe Jens can take the second question. In terms of net working capital, it's clear that we have worked, you can say, in order to rightsizing payment terms and supplier payment terms and so forth. So, -- but also impacting by the freight rates.
So, I would say that we will not be in the low two times -- or 2%, but we will either be in the 3.5% that we were last year. So, I think the rightsizing, I would assume, would be around 2.5%-ish as a general rule.
Jens Lund
And the two lines -- it's not appropriate to comment too much on that. But as far as I understand, the separation is planned for 2025. So that's a few days out in the future. and we don't as such do not expect it to have a big effect on us. We have had separate dialogue, of course, negotiations and relations with each individual carrier. So, as such, we don't expect it to have a big impact on our business.
Marc Zeck
Thank you.
Operator
Thank you, Marc. The next question will be from the line of Sam Bland from JPMorgan. Please go ahead, your line will be unmuted.
Sam Bland
Thanks. Thanks for taking the question. I've got two, please. First one is sort of an air versus sea question. We've seen these spot rates come back, I think, more or less to where they were before COVID. Air looks like it's still a bit higher. Can you just talk about whether you see reasons for air to stay higher for longer and then how that feeds into your yield guidance?
And the second question is on this short spot effect. We're talking about that through the second half of last year as well. I guess we have seen unit margins come down quite a bit, does that say that the short spot position sort of hasn't worked as expected? Or is it that unit margins would have come down by more, if you didn't have it? Thank you.
Michael Ebbe
I would hope that is the last thing that you say is correct. We believe that being short is the right thing to do it has definitely protected the proportion of the GP that stem from the [indiscernible] So, we are believers in that. You're right, it has come down, but it's come down to a level that we had anticipated. And for us, there's no drama in the development we have seen.
When it comes to air, it's also right that the yields have dropped at a slower pace it all remains to be seen what happens now in 2023. We are a little bit concerned that also we will see -- I would not call it an acceleration, but a continuation of the declining yields for air freight.
We will see some overcapacity also. We have not seen it yet. But of course, there's always the risk of irrational pricing behavior, if you sit on assets, which cannot be utilized. We don't have any assets which are not utilized, but it's a little bit speculative to go into. But we have to see -- we have not seen anything yet, but of course, we are following the situation very closely. And I think that is basically as much as we can say about that at this moment in time.
Sam Bland
Okay. Thanks very much.
Operator
Thank you, Sam. The next question will be from the line of Rachel Short from Jefferies. Please go ahead, your line will now be unmuted.
Rachel Short
Hi, thanks very much for the call. My question is already somewhat been addressed around M&A plans for the next year, but I was just wondering if you have any kind of ideas on limits on the size of the deals you might be going for or the level of transformation or if it's just sort of an opportunistic outlook for now? Thanks.
Jens Lund
The answer is basically no to that question.
Rachel Short
Yes, I thought as much. Thank you.
Michael Ebbe
Not meaning that we don't want to answer it, but meaning that they are basically, in principle, no limits. I didn't want to be rude or disrespectful just to make that clear.
Rachel Short
No, no. Not at all. Thank you.
Operator
Thank you, Rachel. The next question will be from the line of Sathish Sivakumar from Citigroup. Please go ahead, your line will now be unmuted.
Sathish Sivakumar
Thank you. I've got two questions here. So, firstly, on Solutions, right? Obviously, you operate based on a sale and leaseback model there. Given the current rising interest rate or funding costs, how is it going to impact the, say, cost of solutions leases as we look into out years into 2023 and 2024, do you see inflation or pricing cost of capital there impacting the operating lease cost?
And the second one is actually on the air freight. Obviously, you clarified that you're not carrying anything from 2022 to 2023 in terms of capacity arrangement with the ocean freight. How does this going to impact the block space agreement that you say, for instance, with Qatar, where you actually buy like six months up in terms of capacity. So, any color around that would be helpful. Thank you.
Jens Lund
Yes, I think I'll answer that. On Solutions, right now, what you see on the warehousing is that if you speak to many of these companies, like [indiscernible] or whatever they are called, I think they are sold out. I think that is the what can I say, view on the market. And it's clear that right now the market is softening a little bit.
And I'm not -- what can I say, the rent that they will charge is not necessarily that correlated to the yield. I mean, that would have been nice if when the yield was slow that they would have said then you also pay a low rent, if you understand what I'm saying.
But they said, no, no capacity is needed, so you have to pay more. Of course, now you are in a situation where there's a little bit less demand. So, they speak more politely to us than they did before on the leases. It's not a big swing in the balance of power.
I can tell you that -- so I think we'll probably see that the significant increases will taper off. There might be a slight reduction on the rent cost. And of course, we have contracts with our customers that are aligned with what we have with the land or otherwise, you would want a very big risk when you operate a business like this. So, I hope that answers your question.
And on the PSAs, yes, we have PSAs in place here and there. They are always supported by back-to-back arrangements so that we don't sit on big, uncovered risk. So that's in reality how we contract with these carriers. And it's been a model that we've been using for years and years. So, both us, the carriers and certainly also the customers are very familiar with that.
Sathish Sivakumar
Okay. Yes. Thank you.
Operator
Thank you, Sathish. The next question will be from Nikolas Mauder from Kepler Cheuvreux. Please go ahead, your line will now be unmuted.
Nikolas Mauder
Good day gentlemen. We're seeing Air & Sea volumes declining, but warehouse utilization is still high and activity in retail and e-commerce is also slowing. How does this factor into your idea for the shape of the destocking throughout the year? And do you think we'll see an orderly destocking or perhaps some undershooting there and also continuing solutions regarding the cost base.
What are your thoughts regarding your long-term conversion rate target given the development of the cost base in the fourth quarter? And can you also comment on the certain one-offs you flagged in the presentation? Thank you very much.
Jens Bjorn Andersen
On the destocking, the inventory levels, it's very difficult for us to find clarity and clear KPIs to use. But of course, shippers and our customers have been very conservative during 2022. They could not unfortunately rely as they were used to on our services. So they did start up to safeguard themselves and their supply chains, which is fully understandable.
You raise an important or an interesting point is be undershooting. We don't have any knowledge that points to that fact, it could also be driven by different verticals that some would actually go lower on inventories as supply chain stabilize, but we typically have to follow that during the year. I don't know, Jens, if there's anything you want to add on the solutions side.
Jens Lund
But it's clear that when we run and operate the Solutions business and also with the little change that we did see also to the methodology in Q4, I don't think you can extrapolate that. You have to look at the at the whole year.
And then of course, it's clear that from a financial targets point of view. It's -- there's still some ground to cover on solutions. We have a lot of programs where we digitize our services further so that we drive up the productivity and not least in the back-office part. So that should help us to get there, and it's start as dramatic as the Road Way Forward program, but we are definitely aligning our system landscape and adding different types of productivity enhancements into the way that we produce our services. So that is, in reality, what should take us to award our target and hopefully achieve them.
Nikolas Mauder
Thank you very much.
Operator
Thank you, Nikolas. The next question will be from the line of Cristian Nedelcu from UBS. Please go ahead, your line will be unmuted.
Cristian Nedelcu
Thank you for taking my questions. See the move of normalization of profits, mean that the first half EBIT will be meaningfully higher than the second half?
Second one, also staying in Air & Sea try to calculate the cost base per unit. I'm getting something like 15%, 20% higher level and the inflationary pressures, but also meanwhile, your volumes doubled longer have the complexity cost of the congested supply chain. My question is, where do you see this production cost per unit stabilizing versus 2019 levels over the next couple of years?
Jens Lund
If you look at H1 and H2, how are we going to fare on the income, it's clear that there will probably be a little bit of tailwind still from higher yields in the beginning, but then I think you will have headwind on the volume side. And then when you go into Q2, I think the yield issue will have stabilized that normalized, but then we will get growth.
And of course, these things they will balance out, and I think will be, at the end of the day, more or less, as we normally see it's showing sort of 48%, 49% in the first part of the year and then the remaining part in the second, I think it should stay in that ballpark.
And then as you say, the production costs in Ocean have been, what can I say, impacted by COVID. And of course, we are working our way back to the same productivity we had before.
But there's one thing that you have to remember as well that the service catalog is not the same. So we offer, what can I say, more services to the customer now than we did in 2019.There's a lot of development on different types of value adds that we are doing. So, you cannot necessarily compare it.
It could be that we have growth in custom formality. So, we do have growth in that we do more purchase order management activities, et cetera. And this is then something that requires more staff, but it also gives us a little bit higher yield. So, we shouldn't expect that everything can be 100% compared to 2019.
Cristian Nedelcu
Thank you very much.
Operator
Thank you, Cristian. The next question will be from the line of Robert Joynson. Please go ahead, your line will now be unmuted.
Robert Joynson
Good morning everybody. A couple of questions from me, please. I apologize, I did miss part of the Q&A before, so apologies if I am repeating anything. But firstly, on the guidance, you the EBA guidance provided today is, obviously, in line with consensus, which is good. But equally, it is lower than the DKK20 billion that you talked about at the Capital Markets Day as being a kind of full level for future years.
Obviously, the macro hasn't been great since last May. But equally, it hasn't been that bad either. The consumer is holding up quite well. And certainly, bear case scenarios for 2023 now appear less likely. Could you maybe just talk about what has changed in your thinking since last May? Is it mainly volume assumptions? Or is it that freight rates have pulled back by more than you're anticipating or more quickly or any other factors there?
And then second question on Solutions EBIT. Could you maybe just talk a bit more about how we should think about that going forward relative to the DKK2.7 billion produced last year, should we be thinking about that level as sustainable going forward? Or should we be thinking about the past few quarters as more of a sweet spot for contract logistics businesses in general that saw quite meaningful help from the market? Thank you.
Jens Bjorn Andersen
Rob, we don't, as you know, guide on particular divisions or countries or anything like that. So, it's difficult to say, but we don't expect the Solutions division to go big time and reverse they're going to make this year exactly 2.7 whatever I cannot, of course, say that. But I don't think it would be too unrealistic to assume somewhat similar result in 2023 as what we saw in 2022. We see nothing that concerns us scare us in substance and solutions. So, we're pretty happy about that.
And I will take a bullet now for Michael and explain a little bit about the DKK20 billion. Michael is very happy because somebody took a photo when he said the train is DKK20 billion on the CMB. And in the background, you could see the PowerPoint presentation, which stated that the basis of that statement that Mike came with was growth in volume going forward.
And now when we say that we expect transportation volumes to decline between 2% and 5%, of course, the situation is different. So, it's not really the yields. I think you have the same yield assumptions as we had back then. Maybe we did -- to be totally fair, we did not -- maybe we did not see the inflation may be hitting, maybe that could explain one percentage point, I don't know. But is the main factor that has changed this philosophy is the volume development. And of course, Michael, you are free to elaborate as you want to say more about it.
Michael Ebbe
I think you will explain this, primarily volume, obviously.
Operator
Thank you, Robert. The last question is a follow-up from Alexia from Barclays. Please go ahead, your line now will be unmuted.
Alexia Dogani
Hi, thank you for taking the follow-up. Just when we think about 2024 or 2025, should we expect 2023 to be the reset and we grow from there? Or do you think it could be a little bit of kind of a prolonged rebasing? Thanks.
Jens Lund
I can only say that we've never experienced that it takes more than a year to rebase. So, if we can base what can I say, our projection on that? I think it will be the same. And I think that was -- I can't remember one of the analysts that said that actually, people were a little bit more -- what can I say, less negative, not positive, but less negative on the outlook. And I think that will then, of course, support, what can I say, that 2023 will be the trough.
Alexia Dogani
Thank you.
Operator
As there are no more questions, I will hand it back to the speakers for any closing remarks.
Jens Bjorn Andersen
Thank you. I don't have a lot of closing remarks, apart from thanking everybody listening in to this conference call. It's been great speaking to you this morning. We will meet a lot of you on roadshows in the coming weeks now. As always, if you have follow-up questions, and I know a lot of you do have that, please reach out to your Investor Relations contacts in DSV.
Again, if anybody from DSV listening in, thank you very much for all your hard work and your efforts in making this an absolutely fantastic year 2022 and also for making a foundation for a good guidance for 2023. We really appreciate this.
So, with that said, we will pack off our bags here in Denmark now and wishing you a good day. Thank you.
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DSV A/S (DSDVF) Q4 2022 Earnings Call Transcript